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 H PTER ONE

INTRODU TION

The strategic role of the financial system is to channel funds from

surplus units to deficit units. The financial system comprising the set of

institutions, markets and instruments facilitates capital formation and

accelerates the pace of economic development. The gap between gross

capital formation and gross domestic savings in India necessitates the need

for augmenting the growth rate of voluntary domestic savings. So, the

working of different financial intermediaries for mobilising savings from

various income categories will have to be widened and strengthened.  

is in

this context that one has to appreciate the role

of

the Non-Banking Financial

Intermediaries in supplementing the functions of the Banking Institutions.

The Non-Banking Financial I nt erm ed ia ri es ability to purvey

funds depends to a large extent on the resources they can mobilise.

Miscellaneous Non-Banking Companies or Chit Funds being a category of

Non-Banking Financial Intermediaries, contribute significantly to the value

of financial markets in India.

1.1 NON-BANKING FINANCIAL

 OMP NIES

  NBFCs)

Non-Banking Financial Companies have emerged as an integral

part of the Indian financial system. NBFC is a generic term, which includes

a host of different types of institutions performing various types of financial

services. Sub-section b)

of

section 45-1 of the Reserve Bank of India Act.

1934 defines a Non-Banking Financial Company as: a) a financial

institution which is a company; b) a non-banking insti tution which carries

on the business of accepting deposits under any scheme, arrangement or any

other manner or the business of lending in any manner and c) any other

non-banking institution or class of institutions which the Reserve Bank may

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notify in the official Gazette with the previous approval of the Central

Government.

 

They are generally categorised into the following types on the

basis of their principal business.

• Equipment Leasing Company ELC

• Hire Purchase Company HPC

• Loan Company LC

• Investment Company

  K )

• Mutual Benefit Financial Company or   idhi Company MBFC

• Housing Finance Company HFC

• Residuary Non-Banking Company RNBC and

• Miscellaneous Non-Banking Company MNBC ie., Chit Fund Company

1.2 MISCELLANEOUS NON-BANKING  OMP NY

The principal business

of

MNBCs or Chit Fund Companies is

managing, conducting or supervising as a promoter, foreman, or agent of

any

transaction or arrangement by which the company enters into an agreement

with a specified number of subscribers that everyone of them shall subscribe

a certain sum in instalments over a definite period and that each such

subscriber shall in his turn, as determined by lot or by auction or by tender

or in such manner as may be provided for in the arrangement, be ent it led to

the prize amount.

Chit Funds are saving devices through pooling of money by a

group of persons by way of periodical instalments of fixed amount paid over

a fixed period of time under int r s agreement that each member of the

group is entitled to the pooled amount The scheme involves three functions

such as pooling together the scattered savings

of

a group of individuals,

lending out the collected savings to a member of the group and continuing

the process of collection and distribution of amounts for a certain period.

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1.3  CHIT AN AGREEMENT

The

 Chit

is an agreement by the subscribers with the foreman

who conducts the Chit. The Kerala Chitties Act

2

defines the Chit agreement

as the document containing the Articles

of

agreement between the foreman

and the subscribers

of

the Chit.

 

contains provisions as to the number

of

instalments amount payable for each instalment provision

of

interest for

default or late payment

of

instalments manner

of

conducting the auction

determining the bidder in the auction mode

of

disbursement

of

discount

limit

if

any on the discount manner of disbursing the Chit amount details of

security to be offered by the prized subscribers etc.

Chit foreman has been described as the hub of the Chitty wheel. 3

  is the foreman who links the savers and borrowers together for their

mutual benefits. The small savings which otherwise might find little

productive application have been mobilised and turned into tangible wealth

by his catalytic action. Thus the foreman acts as a social functionary. From

an individual foreman with very limited resources and area of operations

the proprietor of a Chit has grown into a company managed by a Board of

Directors or to a public sector Chit company having abundant resources and

wider frontiers

of

business. These changes have had far reaching influence

in the sphere of Chit Finance in Kerala. This unique financial institution

facilitates savings and capital formation even among the

poor

in the society.

1.4 ORIGIN OF

CHIT

FUNDS

This indigenous financial institution had its origin in the State of

Kerala as Grain Chit or

  hannya

Chit

centuries

back.

 Chit

means a

written note on a small piece

of

paper. In Malayalam language it is known

as  Kuri a synonym of Chit. The  Chit or  Kuri is a derivative the root

being the

 lot .

The Chit Fund business is administered by the respective State

Governments through the offices

of

the Registrar of Chits. The Chit Fund

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Companies are exempted from the requirement of registration under the RBI

Act. However, the deposit acceptance activities of these companies are

regulated under the Miscellaneous Non-Banking Companies (MNBCs)

Directions, and those relating to the advertisement for soliciting deposits are

governed by the Non-Banking Financial Companies and Miscellaneous Non

Banking Companies (Advertisement) Rules, 1977 framed by the Government

of India under section 58 A of the Companies Act, 1956.

1.5 CONCEPTS AND   EFINITIONS

 Chitty

means a transaction, whether called Chit or

Kuri,

by

which one or more persons, hereinafter called the Foreman or Foremen ,

enter into an agreement with a number of persons that every one of the

contracting parties shall subscribe a certain amount

of money or quantity

of

grain or other commodity by periodical instalments for a certain definite

period and that each in his turn, shall be entitled to the prize amount,

whether payable in cash, kind or any other art icle of value or in such other

manners that may be provided for in the agreement.

4

 Chitty

amount

or

 sala

means the sum total

of

the

subscriptions payable by all the subscribers for any instalment without any

deduction for discount.

 Discount means the amount of money or quantity of grain or

other commodity, which a prize winner has, under the terms of the •

variola

,

to forego for the payment of  veethapalisa foreman s commission or such

other expenses as may be prescribed.

 Variola

means the document containing the articles of

agreement between the foreman and the subscribers relating to the Chit.

 Veethapalisa

means the share of a subscriber in the discount

available under the

variola

for rateable distribution among the subscribers at

each instalment of the Chit.

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 Drawing

includes the mode

of

ascertaining the prize-winner at

any instalment

of

the Chit by lot or by auction or in such other manner as

may be provided for in the •variola .

 Foreman

means the person who, under the

variola

is

responsible for the conduct of the Chit and includes all persons taking his

place under section 35 of the Act.

 Subscriber

includes a person who holds a ticket or fraction

of

a

ticket and also a transferee by assignment in writing or by operation of law.

 Ticket means the share of a subscriber in a Chit, which entit les

the holder thereof to the Chit amount at

anyone

instalment with or without

any deduction by way

of

discount.

 Prize

amount

means the Chit amount whether payable in cash,

kind or in any other article of value, less the discount.

1.6 DIFFERENT CATEGORY OF CHIT FUNDS.

Chit Funds are of different categories, which come under the

broad heading,  Chit Finance . In Kerala they include the public sector Chit

Company (The Kerala State Financial Enterprises Ltd.), Co-operatives,

Private Chits and those in the informal sector.

1.7 KERALA STATE FINANCIAL

ENTERPRISES

LTD. (KSFE)

The KSFE, a fully owned Government Company was established in

the year 1969 as a discipline factor to private Chit Funds. The share of KSFE

in the total volume of Chit business registered in Kerala is 77 per cent as on

March 2000, though the number

of

Chits registered is only 37.5 per cent.

KS has been included in the few profit-making public companies in the

State with a profit of RS.793 Lakhs at the end of March 2000. There are over

  Lakh subscribers in various schemes of KSFE. The number of Chits run by

KS amounts to 7,446 with a total capital

 sala

of over Rs.952 Crore.

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Table 1.1

Number and   a a

of Registered Chits

as on March 2000  Rs. Lakbs Institution-wise

Name

of

the

Number of

Share of each

Capital

Share of each

to total

to total

Institution Chits

/Kuries

Percentage

sala

Percentage

I. KSFE

7446

37.5 95249

77

2. CO- OPERATIVES 8793 44.2 21101

17

3. PRIVATE CHITS

3633 18.3 7701 6

Total 19872 100 124051

100

Source: Government

of

Kerala, Legislative Assembly Interpretation

Registration Dept. I.G

o f

Registration, Trivandrum.

The Number

of

Chits run by Co-operative societies amounts to

8,793 44.2 ) with a total capital  sa/a of Rs.211 Crore 17 ) and the

number of Chits run by Private Chit Funds amounts to 3633 18.3 ) with a

total capital

 sala

of RS.77 Crore 6 ) for the above period.

 

is thus

clear

that KSFE Ltd. has the predominant share in Kerala s Chit industry. Table

  above presents the growth of the Chit Fund Industry in the registered

sector only. The actual volume

of

Chit business would be several times

greater

if

one included the volume of Chits in the informal sector and those

with bases outside Kerala.

1.8

CO-OPERATIVES

Co-operative Institutions are also conducting Chit business as one

of their most profit making schemes. Wide prevalence

o f

co-operatives even

in the remote villages enables the mobilisation

of

th e

scattered savings

among the common people. To escape from certain provisions of the Kerala

Chillies

Act, the co-operatives have started

 Ch it lik e

schemes 5 such as

Monthly Deposit Scheme MDS) an d Mutual Benefit Scheme MBS) without

getting Chits registered with the Registrar. Though th e number

of

registered

Chits with the co-operatives forms 44.2 per cent , the share

of

it in the total

volume of Chit business is only 17 percent.

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1.9 PRIVATE

CHITS

Private Chit Funds have flourished in Kerala from time

immemorial. Though the share of private Chits forms 18.3 per cent in the

number

of

Chits registered their share in the total volume

of

Chit business is

only 6 per cent. This is due to the reason that a considerable volume

of

Chit

business in the private sector are conducted without registration in the State

and therefore outside the purview of official records.

1.10 INFORMAL

CHITS

Along with the formal Chit Fund sector there exists a highly

heterogeneous and dynamic informal sector with huge volume

of

business.

This includes Chits conducted by the associations

of

traders/merchants

employees in the offices and those informal Chits in urban and rural

localities churches temples educational institutions small and medium

Chits in the neighbour hood run by housewives etc. In every nook and

corner of Kerala one can find

 Chit collectors

mobilising substantial

amounts of savings daily for which authentic data is not available. Though

the presence of informal Chit sector is significant there have been numerous

cases

of

fraud misappropriation disappearance

of

foremen etc. which

cause loss to the subscribers and damage the reputation

of

Chit Funds

Industry in the State.

  STATEMENT OF THE PROBLEM

Our analysis of Table 1.1 had established the predominant

position of KSFE in Kerala s Chit industry. However this statistics takes

into account only the data from registered Chits. But it is a well known fact

that there is a much larger unregistered informal sector on which we have no

reliable data. The continued popularity of the non registered sector even

after so many years of existence of KSFE and the implementation of   illy

Acts is intriguing and calls for a detailed enquiry.

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  has to be appreciated that the pre-eminent position

of

KSFE is

very good for the healthy growth of the entire industry. However, despite the

remarkable growth of KSFE, there are many forces in the environment,

which act as a threat to the organisation and to the  hit industry as a whole.

Chit business in Kerala flourished in the hands of private monopoly

till the implementation of the Kerala  hitti s Act, 1975. The Act was brought

into force to introduce a unified procedure to regulate the Chi t business in

Kerala and to protect the interests of the  hit subscribers. But the

implementation of

the Act resulted in an exodus

of

foremen from Kerala to

other states for starting Chits, especially from bases in  ammu   Kashmir and

Haryana defeating the very purpose

of

the Act. At the same time, why the

foremen rushed out of the State has not been comprehensively accounted for.

The introduction of the Central Chit Funds Act, 1982 7 was

expected to take care of this exodus. However many States including Kerala

have not yet adopted the Central Chit Funds Act. Hence there is the need to

examine the limitations

of

the existing Chit legislation and the whole gamut

of

it in the light of the experience gained so far.

Despite the growth of a wide range of savings avenues and the

widespread network of

banks and other financial insti tut ions, Chit scheme

still forms an important part in the asset portfolio

of

many households and

firms in Kerala. The promoters of Chits in the private sector appropriated for

themselves substantial amounts accruing out of their management and there

was also ample scope for exploitation of the subscribers. With a view to

ensure safety, security and better service to the Chit subscribers, the State

Government established, The Kerala State Financial Enterprises Ltd. KSFE

in 1969 for conducting Chit business and other financial transactions. The

objective

of

starting KSFE was to check the mushroom growth

of

private

Chit Funds by offering effective competition and thereby safeguarding the

interests of the Chit subscribers. The co-operative sector also has developed

into a stronghold of Chits. In addition, there is the conspicuous presence of

the informal Chit Fund sector. Though there are different avenues

of

savings

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and different categories

of

Chit Funds mobilising the scattered savings of the

people what motivates the subscribers in preferring Chits and also particular

types of Chit institutions has not been examined.

One

of

the most important objectives in setting up KSFE Ltd. as

already mentioned was that it would take up the leadership in Chit Funds

business as a whole and thereby safeguard the interests of subscribers by

offering effective competition. Hence it is also worth examining the

effectiveness

of

KSFE as the leading institution in this industry. There has

been criticism against the complicated formalit ies inadequate customer

service and the high rate

of

interest charged on its loans. The high default

rate the under utilisation and mismanagement

of

funds have been subjected

to lively discussion. Red-tapism and bureaucratic delays in the operation

of

KS

and its role as a competitor to other Chit Fund institutions have been

questioned by many and so needs to be examined and evaluated. As part

of

the current economic policies KSFE might even face the threat of

disinvestment and

if

so has to forgo the privileges enjoyed by it as a

government company.

Hence there is need for a study which seeks to make an inter

institutional comparison between various categories

of

Chit Funds.

 

also

requires a detailed analysis

of

the chal lenges and opportunities

of

KSFE

from a strategic management angle.

1.12

S OPE

AND

RELEV N E

The present study entitled A Study of Chit Finance in Kerala

with special emphasis on Kerala State Financial Enterprises Ltd. hence

examines the socio-economic aspects

of

Chit schemes run by the private Chit

Funds KSFE co-operatives and informal Chi t Funds. The study is an

attempt to find the reasons for the growing popularity

of

Chit Funds as

savings

cum borrowing avenues even in the presence

of

various other

avenues

of

savings and borrowings and also to understand how the Chit

subscribers utilise the funds. This study also examines the limitations

of

the

 

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Chit Acts and suggests suitable recommendations. An analysis

of

the

working of Chit Funds helps us to suggest the necessary measures required

for improving the functioning of such institutions.

The study takes stock

of

the working

of

Chit Funds in general and

KS in particular, reviews the performance and estimates the

cost nd

return on Chits. The study covers the period from 1960 to 200   KSFE was

selected as the focal point

of

the study for the following reasons:

1. The Kerala State Financial Enterprises Ltd. is a unique experiment as the

only public sector Chit Fund Company in the whole

of

India, which is

fully owned by a state government.

2. KSFE is the dominant foreman in the Chit business in Kerala managing

about 77 per cent

of

the total Chit capital  sola .

3. The presence of KSFE is believed to check the unscrupulous operation

of

private Chit business.

4. The KSFE is one

of

the few profi t making public sector enterprises in the

State and also generates direct employment opportunities to more than

3000 persons.

The review

of

l iterature shows that there are only a few studies on

Chit Finance. The All India Rural Credit Survey District Monograph, Quilon

 Reserve Bank of India, 1958 8 is one of the first attempts at a scientific

enquiry into the working of Chit Funds. But it surveyed the Chit Funds of a

very limited area only. The reports

of

the study groups appointed by RBI and

Government

of

India from time to time have explained

their

working in some

detail and made a few recommendations for the healthy growth

of

NBFCs

including Chit Funds.

9

Individual researchers l ike C P S Nayar 1973

10

and

Radhakrishnan, S 1975 have done pioneering works on Chit Finance,

 ut

these studies are rather too old and hence may not reflect the present picture.

Although there are studies on Chit Finance, there is no specific

comprehensive study on the public sector Chit Fund Company KSFE

especially, in comparison with its competitors. In this context, an enquiry is apt

 

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to be made on the socio-economic objectives and the performance of KSFE vis-

a-vis the other Chit Fund companies in the financial sector of Kerala.

1.13 OBJECTIVES OF TH E STUDY

The objectives of the study specifically are: -

I. To examine the trends and pattern of growth

of

C hi t Funds in the formal

sector in Kerala.

2. To assess the performance of KSFE as the only public sec to r C hi t Fund

Company in India.

3. To identify the determinants behind the preferences for joining Chit Funds.

4. To estimate the cost and return on Chit Funds.

5. To assess and compare the relative preferences

of

Chit subscribers

towards KSFE with that

of

other Chit Funds.

6. To identify the major problems

of

Chit Funds in Kerala in general and

KSFE in particular.

7. To make suitable suggestions for improving the working of KSFE and

Chit institutions in general.

1.14 SOURCES OF DATA AND METHODOLOGY

The study is based on data both from primary and secondary

sources. To study the trend volume and growth

of

Chit business in the

formal sector data have been collected from the Registration Department

Government of Kerala and from Registrars Offices at district level. To

assess the performance

of

KSFE Ltd data have been

collected

from the

head-office and from its various branches selected randomly.

Data

were also

collected from Reports Journals Books Reserve Bank of India Publications

and Government Publications.

To study the trend and volume of Chit business run by co

operative societies data have been collected from the State administrative

office

of

co-operative societies at Trivandrum and

Joint Registrar s

offices

at the district level. An attempt was also made to collect data on Chit Fund

 

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institutions registered outside Kerala especially from bases in Jammu and

Kashmir and Faridabad with the help of Chit Foremen Associations.

A survey among subscribers has been conducted to identify the

motivational factors behind

joining

Chits, reasons for preferring various

categories of Chit Funds, to analyse the fund utilisation pattern of  hit

subscribers, to trace their problems and to obtain suggest ions for the

better

performance of the institutions.

A survey among KSFE employees was conducted to get their

opinion on KSFE schemes, its problems and level of customer service.

Personal interview was conducted with a number

of

private

 hit

foremen including those who are registered and with bases outside Kerala to

study their working, the rights and obligations, the legal aspects

of

their

registration, the problems faced by them and also to collect suggestions.

1.15THE S MPLING DESIGN

A sample of 400 Chit subscribers was selected from all the

traditional three regions

12

in Kerala, namely, Trivandrum, Ernakulam and

Calicut. The selection of these districts was also guided by the fact that these

are the three districts with the highest volume of Chit business. A fourth

district, viz. Trichur, also was selected due to the strong presence of private and

informalChit Funds.   also coincides with the location ofKSFE headquarters.

The sample subscribers were selected from all the four districts,

 ro

among di fferent categories of

 hit

Funds, namely, KSFE, co

operatives, private and informal, by taking into consideration

their

share in

the volume of Chit capital and also to represent rural and urban areas.

Accordingly 160 (40 ) subscribers were taken from KSFE, 114 (28.5 )

 ro co-operatives, 86 (21.5 ) from private, and 40 (10 ) from the

informal sector. Selection of sample subscribers was made at random from

the subscribers list with the foremen, by giving representation to rural and

urban areas.

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A sample

of

165 KSFE employees was selected from the four

districts: Trivandrum-50

Ernakulam-45 Trichur-40 and Calicut-30

taking

into consideration the staff strength in the respect ive districts.

  6 TOOLS OF ANALYSIS

Simple statistical tools such as averages percentages and ratios

are used for the analysis of data.

To

examine the t rend

in the number of Chits registered

and

in

the

volume of Chit business trend analysis by the method

of least

squares has

been used.

Scoring and Ranking

Method

has been used to

identify the

determinants behind the preferences for joining

Chit

Funds.

To

estimate

the cost and return on

Chits Discounted

Cash Flow

Method has been used.

To assess and

compare

the relat ive

preferences

of

subscribers

to

various categories of

Chit

Funds Chit Funds

Rating

Analysis  Competitor

Rating Analysis has been used. Ranking

of

parameters done by the

subscribers vis-cl-vis its peers have been used to work out Chit Funds

Rating. Weights have been

 different

levels given to

these

ranks to

rationalise them.

BCG Growth-Share Matrix

Default-Revenue Matrix

and SWOT

Analysis have been used to identify the

challenges

and opportunities of

KS

as a Chit Fund Company in

comparison

to its competi tors . The

present

study being exploratory in nature does not

advance

any hypothesis.

  7 LIMITATIONS OF THE STUDY

The inabil ity to estimate

the

volume of Chit

business

operated by

the private

Chit

Funds from bases

outs ide Kera la

poses difficult ies.

 

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Similarly there is

paucity of reliable

data on

the

huge

volume of

Chit

business in the informal sector

The

general

reluctance of the people to reveal data

on

income

and

savings made the task of collecting data somewhat difficult

1 18 SCHEME OF

THE

STUDY

The study is presented in seven

chapters

The introductory chapter

presents the statement of the problem scope objectives and the research

methodology adopted

The second chapter

reviews

the available literature in the

area

and

highlights the theoretical

backing

Chapter Three gives an overview

of

the evolution growth and

importance of Chit Funds

with

its

unique features

the operational techniques

used by

different

Chit institutions and an estimation

of the cos t

and

return on

the Chit scheme

Chapter

Four

presents

the origm development and performance

evaluation of KSFE in the State of Kerala

The fifth chapter

presents

the mot ivat ional factors for joining

Chits particular types

of

Chit Funds an analysis

of the

problems of Chit

subscribers and a comparative assessment of various Chit

Funds

in

Kerala

Chapter

Six analyses the challenges and opportunities of the Chit

Fund industry with

special

emphasis to KSFE

The concluding chapter

provides

a summary

of

the findings

makes suggestions and discusses policy implications

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Notes

 n

References

  Statutory Guide for Non-Banking Financial Companies: An Authorised

Publication of Reserve Bank

of

India. The Taxman Allied Services Pvt.

Ltd., 2000), pp.I-12.

2.

The Kerala Chitties Act, 1975 Act 23

of

1975). An Act to define,

amend and consolidate the law relating to  hitties in the State of Kerala,

Ganesh Publications, Kochi, 1995),

p

3.

Nayar, C.P.S. Chit Finance

n

Explorative

Study

on the Working  

Chit Funds Vora and Co. Publishers Pvt. Ltd., Bombay, 1973), p.115.

4.

The Kerala  hitties Act, 1975, op. cit ., p.2.

5.

The Chit-like Schemes function exactly like the Chit scheme. They can

be conducted by co-operative society/bank without registration af te r

obtaining sanction for t he ir bye-laws from t he

Joint

Registrar

of

Co

operatives of the concerned circle, thereby escaping from the provisions

of the Kerala

 hitties

Act, 1975. Such schemes fall outside the purview

of

official Chit records.

6. Agents or commission agents who collect Chit subscription regularly at

the door of the clients.

  The Chit Funds Act, 1982. Act No.   of 1982). An Act to provide for

the regulation of Chit Funds and for matters connected with it, Law

Publishers India) Pvt. Ltd., 1998).

8.

All India Rural Credit Survey, District Monograph, Quilon, Reserve

Bank of India Publication, Bombay, 1958).

9.

For example: i) The Report

of

the study group on Non-Banking

Financial Intermediaries: Banking Commission, Government

of

India,

  1972), had recommended the need for a uniform Chit Funds legislation

applicable to the whole country. The Commission also observed that it

would be desirable to provide in the legislation that only public limited

companies can run Chit Funds.

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 ii) The Report

 

the study group on Non-Banking Companies under the

Chairmanship

 

James S Raj  1974) recommended for the enactment  

the central legislation for Chit Funds. The group also recommended that

the administration   the law should be left to the State government

concerned which in turn could seek the advice and assistance   the RBI

on policy matters. They recommended a ban on prize Chits benefits

saving schemes, as these were detrimental to general public interest.

 iii) The Report

 

the working group on financial companies, under the

Chairmanship

 

A C Shah

 1992).

1 Nayar, C.P.S. op.cit.

11

Radhakrishnan, S. et al,

  hit Funds

 n

Finance orporations

IFMR

Publications, Madras,  1975).

12 Traditionally Kerala consisted

 

three regions namely the princely

States

 

Travancore, Cochin and the region

 

Malabar. On November

1, 1956, these regions were merged to form the new State called Kerala.

16